Investors in Cooper Tire and Rubber are being forced to pick lanes. Legal wrangles have put Apollo Tyres’ agreed $2.5 billion offer for Cooper Tire, its American rival in doubt, and tensions at Cooper’s China joint venture have undermined its value. But a negotiated price reduction still looks possible. Cooper shares may be pricing in too much bad news.
Cooper shareholders must choose between four broad outcomes. The least likely is that the deal goes ahead on the agreed terms of $35 a share. Apollo has made it clear that it would like a lower price. Its lenders are also getting cold feet.
If the deal falls apart, Cooper shares might be expected to fall back to their pre-bid price of $24.50. But the wrangle with Apollo has exposed Cooper’s less-than-firm grip on its Chinese joint venture, which contributes around a quarter of its parent’s revenue and earnings. Assume the subsidiary’s value is reduced by 25 percent, and Cooper’s standalone value drops by $100 million, equivalent to $23 a share.
There is room for negotiation between these two extremes. One possibility is that Apollo adjusts Cooper’s value to reflect the reduced value of the Chinese business and then applies the same 40 percent premium as before. In that case, Cooper shareholders would receive around $32 a share.
Apollo might, however, seek to pay a lower premium. Say it offers just 20 percent more than Cooper’s reduced standalone value. Shareholders would then be presented with an offer worth just $28 a share.
Investors are taking a dim view. Take Cooper’s closing share price of $25.81 on Oct. 11. One way of interpreting that number is that investors think there is zero chance of the deal going ahead at the original price, a 60 percent probability of failure, and just a 20 percent possibility of either renegotiation situation proving correct, according to a Breakingviews calculator.
The longer the dispute drags on, the greater the damage to Cooper’s value. But that also makes it more likely that Cooper renegotiates with Apollo - or finds another bidder. Cooper shareholders aren’t attaching much probability to that lane providing an exit from the current mess.
Una Galani is a columnist and Peter Thal Larsen is Asia editor for Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.
